Mass Timber and the Future of Sustainable Housing Development
Transcript
Atif Z. Qadir 00:10
Welcome to American Building. I'm your host Atif Qadir. Join me as we explore the skylines and strip malls, the crosswalks and rail crossings, the balconies, the buildings and the boroughs shaping the next generation of real estate. Let's build common ground.
Atif Qadir 00:32
Today, we will be talking about The Edison, a new construction luxury residential rental building in Milwaukee, Wisconsin. This is a 378, unit, 31 story mass timber passive house development. It'll feature a wide array of tenant amenities and will serve as the hub in Neutral's hub and spoke model of development. That is one in which a large building provides amenities and services for nearby smaller buildings owned by the developer. Construction started in quarter four of 2024. Thank you so much for being here with us, Nate.
Atif Qadir 00:32
Our guest is Nate Helbach of Neutral. Neutral is a forward-thinking real estate development firm based in Madison, Wisconsin. It is focused on creating highly sustainable, carbon neutral buildings, and they have an emphasis on innovative materials, resident health, passive design, cutting edge construction methods and renewable energy sources. The company is redefining how modern developments can achieve both environmental responsibility and financial viability. Nate is the founder and CEO of Neutral. He leads financing, capital markets, accounting, investments, product development and construction oversight of the company's developments. While studying finance and sustainability at Harvard's Extension School, Nate developed a framework for Neutral, aiming to redefine conventional development strategies and mitigate the environmental impact of buildings. Before starting Neutral in 2020, he worked with another Wisconsin-based developer.
Nate Helbach 02:13
Thanks for having me.
Atif Qadir 02:15
Absolutely So, taking a step back, tell us about your experience as a student and in working for another development company early on, and what you learned from that.
Nate Helbach 02:24
It was a great way to learn and a really good catalyst into understanding the kind of holistic development process. Because I think the development process can be sometimes elusive and really unique to specific state and even local jurisdictions. And so having the very dynamic dichotomy between working in a real estate development company and then also studying finance and real estate development gave me this kind of good practical experience, along with the academic knowledge of really understanding how these academic principles apply to the real world. And sometimes the ivory tower, so to speak, does not necessarily have complete application in the real world. And sometimes the real world has things that it could learn from academia.
Nate Helbach 03:18
And so one thing that was really nice about doing both at the same time, which I think is unique, compared to kind of going through all your schooling and then going in and really understand real life experience, was it gave you this kind of really good almost yin and yang between understanding what the principles are and the underlying kind of fundamentals, versus how the practical application sometimes deviates from these things that should be fundamentals, right? Like how the market works is not always consistent, nor is it a straight line. It's sometimes a random walk. And so going on these random walks and understanding how to navigate those random walks using facts and principles from academia really kind of helped give me a good foundation in real estate development and real estate investing.
Atif Qadir 04:10
So as you were getting started, both on the academic side and the ivory tower, as well as with a traditional stick built developer, what were some of the observations that you started making about the real estate industry.
Nate Helbach 04:24
It's very antiquated was the first observation I made. All of us growing up in the kind of late 90s and into the 2000s have seen this really tech revolution. I mean, if you think about it, in the early 90s, you didn't even have any type of smartphone, and by the early 2000s you've had a ton of smart technology come out, and you got a lot of different new applications. And then moving into the kind of late 2000 teens and into the 2020 you have amazing technology, right? Like we've had the birth of this smartphone, the holistic computer, you can do Zoom calls from wherever you want. And really, this is just a new landscape of how we do business in the modern world. And so real estate, I would say, along with insurance, and along with finance, has been one of the latest and really, not really adopting anything yet. So it's one of the only adopters of not really utilizing the technology that's there. And so what I saw working for just kind of a traditional down the fairway developer, was we're using a lot of systems that are the same way we've been using the same systems in the 60s, 70s and 80s, and those systems are antiquated and inefficient, and they're actually quite risky.
Nate Helbach 05:45
And so one thing I was kind of continuing thinking about is, how do you refine some of these systems to actually de-risk your real estate investment? Because one thing we really think about at Neutral is what is not just our return, but what is our risk adjusted return? And what we mean by that is, how much risk are we taking for the amount of return we're projected to receive from a specific asset? And maybe we could take, maybe we could get 40-50% right, which would be unheard of for real estate.
Atif Qadir 06:18
That'd be amazing.
Nate Helbach 06:18
Somewhat hyperbolic, but let's just say you get 40% or 50% and you're taking an unprecedented amount of risk where you could potentially lose your whole investment. The risk adjusted return probably is not judicious enough to be able to enter into that investment proposition. And so what we look at is, how do we de-risk the projects all the way throughout the development process to be able to have a appropriate level of risk and return throughout kind of the life cycle of development. And so one thing I really learned as a kind of key indicator at a previous firm was real estate as a kind of overarching industry is antiquated, and within that kind of antiquation, there's a lot of unknown risks that technology could give you more insight, more data to be able to de-risk some of those propositions. And so one of the things we're trying to do at neutral is really the what we call a tech-enabled developer that uses technology to help us holistically understand the risk and the risk adjusted returns of real estate.
Atif Qadir 07:31
Amazing. So some of the things that you highlighted as the problems are the way we build in terms of the materials and the methods, the financing of projects, as well as the wraparound services, I could say, like insurance. Were there any other problems that you saw during the building process when you were at their previous firm?
Nate Helbach 07:54
Yeah. I mean, a lot of it, I would say, is encompassed into acquisition of sites. A lot of developers, when they look at buying a site, they're not really doing a holistic study of how many units could we get on the site. What does the entitlement process look like? And going through kind of a rigorous evolution of the development process for a few reasons. One is, it's actually quite expensive in the old model where you have an architect, an engineer, a developer, general contractor, and to get all those kind of main participants on board to do a full analysis is quite expensive, and so most developers don't want to expend that cash early on, because they don't even know if they're going to get the site right, and if they do get the site, they don't know if they're going to get entitled. If they get entitled, they don't know if it's going to be within budget. And so part of the risk that we were identifying was, if you're going after a site, how do you understand what the cost of the actual construction is?
Nate Helbach 08:58
And going one step back, how do you understand what you're actually going to build? And so one thing we've done at neutral is we've put together an algorithm that looks at zoning for a city, and it tells us exactly what we could build prescriptively in that specific area of the city. And then it even goes a step further by iterating and creating a full model, BIM model for us to be able to understand what we're actually going to build. So like one project that's currently under construction right now is a four story project in downtown Madison, and from pretty much the first day that we wanted to look at buying the site, we knew roughly what we could build on the site, how many units we were going to get on the site, and a rough order of magnitude of cost for that site. And that's something that's revolutionary compared to other developers, because a lot of developers would just go to the seller and say, Hey, I think I'm going to get 20-30 units on the site. I'll pay you $1.5 million, right? It's kind of like, yeah, put your finger in the air and see if the wind blows on it. And it's really kind of old school. And it's worked for a lot of guys, like a lot of guys, have been making money in real estate development for decades, if not a millennium, and they continue to do so. Our approach is, let's use the tools we have. Let's use technology to get a little bit smarter and try to figure out how we can decrease our risk from early on in the process. So I think there's a few other areas that maybe we'll talk about later on in the podcast, but that is one of the main ones.
Atif Qadir 10:36
Yeah, so I think that segues well into a focus on the four parts of the philosophy of your company. So it's people, place, profit and planet. So could you talk about how you develop those parts of your philosophy and how they tied to your early experiences before starting neutral?
Nate Helbach 10:56
Yeah. So one thing that I really wanted to focus on was starting neutral. And really the impetus behind the name was, how do we create carbon neutral environments that reduce both embodied and operational carbon? And this was something that in school you get very kind of philanthropic about, and probably a little bit too out in space, I'll say, because it's something that is very hard to achieve in reality. And so one thing that we really focused on is, how do we take an iterative approach to this philosophy and goal? Because it's a really big goal and it's very, very difficult to achieve in practice. Not that it's hard to design a building that's carbon neutral or hard to design a building that uses very little energy, but it's much harder to take that building, design and finance it and construct it and be able to stabilize it in cash flow, because the amount you have to expend to build these type of buildings doesn't really equate to the amount of revenue you're going to receive to be able to give the investors an adequate return.
Nate Helbach 12:05
So one thing that kind of hit me in the face, I'll say, when I started the firm, was I really wanted to go after these big aspirations, but we kind of had to look at them pragmatically and say, Okay, what's the first step? What can we do right now that's financeable, that investors will understand, and we'll be able to go to the next step, and hopefully the next building is a little bit better. And so that's what we've been able to do. Is our first building, we're at about 45% reduction of embodied carbon emissions, about 50% savings in operational carbon. Our next building, we are at 55 and 55 our next building, which we just broke ground on on Monday, we are at 58 in body carbon reduction, and we're at a 72% reduction of operational carbon. That's The Edison, and that will be the first living building certified high rise, and it will be a passive house certified building, and that's one of the reasons why we're getting great stats on the operational side.
Nate Helbach 13:07
But, going back to your question about the philosophy and looking at kind of these four parts of what real estate really impacts, which is people, place, profit and planet. And if we just go through those, we're serving people, ultimately. If you really think about it, multifamily is really a hospitality business. And so ultimately this is where people live, and they're living in these facilities, in our beautiful buildings, and they're spending somewhere between 55% to 70% of their lifespan during the time they're living in our buildings, in our buildings, and so we really want to make sure that we're designing for people and not just for a beautiful looking massing or a really profitable building. We want to make sure that these buildings are both improving people's lives and having a beautiful, hospitable spot for them to live. So that's the first one.
Nate Helbach 14:01
Place we're building around neighbors. And if you want to keep building a city, you want to keep your neighbors happy. And so we really want to make sure that we create a sense of place and that the neighborhood really loves they're not just saying, oh, there's that nasty developer that neutral is coming into our neighborhood and they're going to make a bunch of money on this terrible project that looks terrible. So I want to have them be super excited and stoked about having us come into their neighborhood and be really enthusiastic about it. In fact, the project we just got done in titling that's currently under construction in Madison, it was like a great testament to this, because one of the neighbors actually showed up to our last plan commission meeting, and he had a poem that he wrote about how great our building is going to be, and how good it's going to be for the neighborhood that we're coming in and we're tearing down like these two old, nasty buildings. And we're putting up this beautiful building. It's four stories, it's mass timber. It's going to be passive house design principles. It has a little corner cafe in the bottom of it that the neighbors can come and participate in.
Nate Helbach 15:13
And he wrote this beautiful poem about how, like, it's going to be this great new asset in the neighborhood. And I was like, I've never seen that before. I entitled 1000 units at my previous job, and we never had a neighbor show up and give us a poem. In fact, it was quite the contrary. It was always neighbors would show up with these long letters about how terrible we were and how arguably ruined their lives, yeah, and how greedy and vindictive we are, right? And so that was a really great testament that we had this past summer of how we're really, truly creating that sense of place and and one of the things that a book I really like is called the 15 minute neighborhood. Another one is the missing middle housing by Dan Pollock. And I really like those concepts because it's really creating this idea of, like, how can you create a neighborhood that you can walk to everything, right? You can walk to your local brochure, you can walk to your neighborhood cafe, you can go pick up your bread, and you have this real sense of place, and it really improves people's lives.
Nate Helbach 16:16
Profit, that one's really easy to understand. You're running a good business. You're going to make profit. It's like not something you should be shy about, not something that you should be annoyed about. It's like businesses, especially for profit businesses, are going to make money. And so our investors expect that of us, and we expect it of ourselves. And so profit is one of those things that I think some people can view as really controversial topic, and I think it's relatively straightforward. If you're running a good business and you have a beautiful product that you're delivering to the market, the market should respond and buy that product, and that means that you should be making a profit. So that's our view on profit.
Nate Helbach 16:56
Planet that really goes back to our core thesis of how do we create these systems and buildings that reduce carbon emissions for our planet? And really, how we think about planet is we really look at things through, I would say, more an environmentalist lens, understanding that we have a finite amount of materials, right? We only have so much wood on this earth. We only have so much minerals and things of that nature. And so we can either use these minerals and woods and renewables in a sustainable way. How we define sustainability is using the same amount as we are producing. So what I mean by that is wood is a great example. Every minute the forest is growing a certain amount of fiber in the forest. And so if you think about it, you go out to your local forest, wherever you're listening to this episode, and you see trees, they're growing, right? They're growing fiber. And so you can actually calculate, on a basis of the forest, how much fiber is growing in that forest every single minute.
Nate Helbach 18:04
And so when you look at that on a yearly basis, and you assess it based on the wood that's coming out of that forest, if those two are in equilibrium, then that forest is sustainable because you're planting or you're growing enough wood that you're taking out of that system. And so we really look at this at a full ecosystem level, and we want to be able to take only the amount that is actually reproducing and regenerating in that same system. And we're definitely not doing this right now. I don't want to be hypocritical and say we are, but that is our aspiration that everything that we have, that we're using to build these beautiful buildings, that we're using it in a sustainable way, that we're actually only taking out the amount that that system is reproducing in that fiscal year.
Nate Helbach 18:04
So the idea being that you're able to reuse materials and not be extractive. So both on the small scale and the large scale. You mentioned, I wanna go back to something you said earlier, which is the nature of your company as a development company with a technology approach. So could you talk about how your company is structured?
Nate Helbach 19:16
Yeah, we're vertically integrated. So we have a lot of things that we've brought in house, and a lot of things we want to continue to bring in house. We have a development team that's kind of integral to our design and architecture team. It's kind of all one unit right now. And so for our low rise projects, we do our own development, we do our own architecture, we do our own interior design. For our larger projects, we do the development side and the interior design side, but we hire third party architect. The main reason for that is we don't want to take the liability yet of the architecture of record role, primarily just because it's a large liability that goes on for years. So we're kind easing our way into being an architect of record on these smaller deals, and then eventually we'll build up into larger deals.
Nate Helbach 20:06
We also have our own technology department, where we have our own software team that builds all of our investor portal software where any investor can go to neutral.us, and you can click, invest with us. And it's all of our own software that you can actually invest right online. They're also building three other tools. The other tool we have not launched yet. One is a design tool that we use to design buildings in a very kind of systemized way. The other one is a kind of resident tool that residents can use and be able to have an app where they can have access to a lot of things in the buildings and also have access control. And then we have our own cap raise team and finance team and accounting team. So that team really focuses on raising capital from accredited investors and then also sourcing all the debt that we need to actually build these projects.
Atif Qadir 20:59
So the idea being that, as opposed to outsourcing all of those to other companies that may have goals or focuses that are not necessarily aligned with yours, you're able to take that philosophy and make sure that that's embedded in each of the different parts of your company. That's very, very fascinating structure. As you were building that are there any companies within the industry or outside of that you use as inspiration to the model of in housing all of the accompanying processes that are part of the development process.
Nate Helbach 21:30
Sorry, I actually forgot too that we also have, I don't want those team members yelling at me after this podcast. But the other two is we have our own construction team that we run our own small developments on our own as the construction manager, and then the larger projects we're the owners rep and we use CD Smith as our general contractor. And then we also have our own carpentry team, which is nine guys, and they do all of our own specialty carpentry. So one thing that we really focus on as part of our mission is, how do we get back to kind of this idea of craftsman orientated design and building? Because a lot of things have gone, especially kind of post modernism, I'll say we've gone to these very manufactured, mass produced routes of constructing. And it's really not very nice to live in, nor is it visually appealing.
Nate Helbach 22:26
And so what we're trying to do is get back to almost this idea of like, if you ever heard of like, this art deco design era, where you have actually really nice, somewhat micro-produced goods. for example, right now we're building a bunch of desks for one of our projects, and it's the same desk, right? And we're building it, I think, eight or nine times, but each desk is hand-produced, handcrafted, has really great details, and the tenants will really like the user experience. And so we really want to get back to a craftsman orientated design and build, and we felt like the only way to do that was by starting our own carpentry, which we called Neutral Workshop. And so what the workshop does is they do all of our own kind of final specialty carpentry. So they'll do slat walls, they'll do wood paneling, they'll do beautiful desks. They'll do concierge, kind of intro little desks and tables, and then they'll do a bunch of little kind of craftsman stuff all over the project as kind of the finishing details. And that really adds another dimension to the building.
Atif Qadir 23:35
As you are growing all these different companies, your leadership is important in order to make sure that the goals and processes are aligned. So could you talk about your leadership style and how it's changed, say, since the beginning of the company in 2020?
Nate Helbach 23:50
Yeah, we when I started in 2020 it was just me, and it was a grind. I'll say I was working probably 75 hours a week, lovingit, but I wasn't married, and I didn't have kids, and so it was something you can do as a single guy. You know, you're a bachelor. It's like, on the weekends, you'll work a nine hour Saturday, or in the evenings, you'll work, and it'll be fine, and I love my job, so it'll be good. But then you start getting other kind of outside voices and opinions and obligations involved, and obviously you have to meet those. And so my leadership has definitely changed over the last five years, especially with now having a wife and having one child and another son on the way. And so it's really gotten to a point where I've learned I can't do it myself, and I need, actually a team to execute the vision that we have. And so being able to delegate authority and delegate tasks has been probably one of the hardest lessons, but probably the best lesson I'velearned over the last five years, because if you can multiply yourself 31 times, which is how many employees we have, then your productivity level goes up exponentially.
Atif Qadir 25:09
Totally.
Nate Helbach 25:09
And so making sure that you have employees and team members that are aligning your vision and align with the goals of the firm, and then delegating authority and trusting them with that responsibility has been a tough leadership lesson, but a great leadership lesson, because once I got there, which has only been probably within the last eight, nine months, and I'm still learning along the way, I won't say I'm at all in a position where I'm super skilled at this, but that has been a unlock for me, of being able to go, I think, to the next level of where we want the company to go. Because as we continue to grow, we continue to have to trust and delegate so that we can continue to do what we're trying to do.
Atif Qadir 25:58
SoI want to shift the focus of the conversation to The Edison. So that's your flagship project that's located in Milwaukee. So tell us about that building in terms of, like, all the numbers, the height, the unit, the cost, the team, et cetera.
Nate Helbach 26:13
Yeah, it's roughly 380 units. We have 31 stories. We do not disclose the cost. So I can't say that. We are passive house certified. We are going to be living building certified, which will be the tallest living building certified structure in the world. It'll be the tallest mass timber structure in the world, and it'll be the tallest Passive House structure in the world. So breaking three records, which is great, and yeah, it's right downtown Milwaukee. We're right across the river from Pfizer Forum, where the NBA Bucks play, right in kind of the core central business district of downtown Milwaukee. And we're right out along the new Riverwalk, which is a kind of mere copy of what the Chicago Riverwalk is, just on a little bit smaller scale, an hour north in Milwaukee. So it's a really great site, cool asset. Excited to get it done in early 2027. We just started our piling and dock wall repair today, and then our first phase will open May of 2027 and our second phase will open August of 2027
Atif Qadir 27:23
Talk to me about the experience of the building once it's complete. So as residents walk through the building, what are they seeing? What are they looking at? What's the experience like?
Nate Helbach 27:32
Definitely a different experience. So one of the things that we really have focused on as part of our people initiative is, how do we create healthier, longer living experiences for our tenants. And so what do we mean by that? What we mean by that is we have a full, holistic health and wellbeing program as a part of our overall building. And so when someone signs a lease with us, it's not just like an ordinary lease, where you sign a lease and you move into your apartment and you never talk to your property manager again. No, not at all. This is way different. We have full-service concierge, like a hotel on the first floor with a doorman that greets you every day. And then we have a full-service nutritionist, personal trainer and doctor on staff with us that if you want to, you don't have to, but it is recommended that you go through our protocol, which is a full diagnostic on your health and well being.
Nate Helbach 28:27
And so we take you through a pretty rigorous exam where we do a RMR, a resting metabolic rate test, which tells you how many calories you burn in stasis every day, a VO2 max test, which is telling you how your cardiovascular health is doing, and it's probably one of the best indicators of longevity, a full DEXA scan, which shows you your muscle to fat composition in your body. So for me, it was, I just went through this test, and I think it was at like 12% body fat, which I was like, man, that's high.
Atif Qadir 29:02
But that's high you said?
Nate Helbach 29:03
That's high. It was super high. I mean, I was like, I thought I was gonna be at like, 10 because I had done it, like, a year ago, and then I just did it. So I was like, I'm gaining weight. I'm staying at the desk too much into what's going on.
Atif Qadir 29:16
Time to get up to a construction site, walk around.
Nate Helbach 29:18
Yeah, exactly. Let's lift some steel and work with our carpenters and throw some hammers around. And then we take you through a blood panel, a mobility analysis, and then you sit down with our trainer and doctor and we give you a plan of action. Maybe you're wanting to lose weight, maybe you're wanting to gain muscle. Maybe you're an athlete and you want to increase your VO2 max. Maybe you're like my wife, who is going to be recovering from having a baby here this summer, and you want to kind of get your strength back. And so whatever it is, we put together a plan for you, and then you can actually either go with kind of the base level, which is just access to space, or you can take a few different tiers of seeing the personal trainer one-on-one, seeing the doctor one-on-one, seeing nutritionist one-on-one. And really have it be kind of almost like this Equinox-style experience. And then we have a huge fitness center in The Edison. We have a massive pool, spa, treatment rooms that we do hot/cold therapy. We have a cryo room. We have a hyperbolic chamber. And we're really looking at, how is this an oasis for someone to come back to again? They typically spend between 50 to 70% of their lives in this space to rejuvenate, recharge, and go back out into the world and really attack their next day. And we're really focused on a holistic living experience, instead of just commodity-style apartment living, where, hey, here's your key and go live in your box for the next 12 months.
Atif Qadir 30:51
So you're talking about common spaces, you're talking about the apartments, you're talking about the experience of being there as a resident, also as a community member. So a bunch of different perspectives. And I think it makes sense then that you have a constellation of companies that are able to imagine what you're describing and then execute on it as well. So one area want to focus in on is your superstructure. So a core part of the value proposition for Neutral is a mass timber superstructure. So could you talk about what that means and how that differs from traditional concrete or steel buildings?
Nate Helbach 31:29
Yeah, when you're building high rises, you have three options right now to pick for what you want your material to be, mass timber, concrete or steel. For us, with our initiatives, really mass timber is the only viable option because of our really strict carbon goals, and our strict goal about being neutral in the sense of the word, where we're really seeing things through a holistic lens of trying to achieve equilibrium in our natural resource environment. And so that's really the impetus of why we've selected mass timber as our primary structural elements on all of our buildings. The kind of other more tertiary benefits of mass timber is that the tenants get a beautiful natural space that they live in. So all the ceilings are exposed with wood, and so it's this really kind of biophilic feel. It also allows you to increase your floor to floor living height, because you're not having to drop the ceilings with drywall and create this kind of dead space.
Nate Helbach 32:35
Instead, you get to expose the structure, which you typically would not do with concrete, because concrete feels really cold, and so you, you get about an extra 12 inches of ceiling height in your living space, which is really nice as well. But that's why we, we select the mass timber. And this is not a full mass timber structure. You really can't do that right now, primarily because you can't really use mass timber for your core. So what is a core for those, maybe engineers or architects that aren't out there, it's basically just your main phrase for what you're using for loading. So your entire center of the building, which is where your elevator shafts are, it's where your typically your stairwell shafts are, it's where your corridors are, that's your core, and we're building that out of concrete, and then from there, we have mass timber. And that's how every other mass timber building has been built to date, because you can't use mass timber as your primary structure in your core elements.
Atif Qadir 33:34
And the other piece that I wanted to dive into is Passive House. So you described that earlier as one core part of your buildings, and that's a topic that we've had guests on the podcast talk about that Ann Rolland from FXCollaborative and Jenny Paysin of Jenny Paysin Architecture. But could you remind our listeners about what Passive House is and how you've incorporated that into the design of The Edison?
Nate Helbach 34:00
Passive House is basically putting a jacket around your building and making sure that jacket is fully sipped, zipped up and nice and airtight. And what you're doing is you're just creating a well insulated, airtight environment that whatever energy you're pouring into that space, whether it be cool air in the summer or heating in the winter that is actually staying in the building, and it's not leaving through all these different openings in the building. And so really passive house can be summed up, there's a lot of intricacies, which I know maybe architects will say, Hey, I'm not doing a good job explaining. But I think for those who aren't architects, can be summed up as putting a jacket around your building and then making sure that the HVAC system is hyper-efficient and you have some sort of energy recovery incorporated into that system.
Nate Helbach 34:54
So for us at Edison, it's actually pretty cool for our cooling system, we are using a quasi geothermal system that we developed, and it's tapping into the river. Since we're right around the river, the river water is cooling the building, so we have these massive pipes going into the ground, and we run river water over them, and then we use that to cool the building. And for heating, we use steam, which is a natural byproduct of the local energy manufacturer. And their plant, they use steam, our steam is a byproduct of their production facility, and they run that through the grid of downtown Milwaukee. And so since it's a byproduct, it's essentially carbon neutral. And of course, it's consuming carbon to make the energy, but if we weren't using the steam, it would just be released into the atmosphere. So we're able to use it for heating the building, which is really adding a lot of efficiencies.
Nate Helbach 35:50
I would say that the other thing, not from an architectural perspective, but more from a finance perspective, the reason why I really like Passive House is it decreases your operating expense for energy by about 70%. And so a lot of people are like, Well, why are you spending so much more money on all these passive house initiatives and increasing the R value of your wall and the U value of your window and adding energy recovery and all these upgraded HVAC ideas? And really the reason is, if you look at a amortized return over the next 50 to 100 years, maybe even 150 this building might be standing. It's actually quite accretive to be able to design with passive house because of the amount of operational energy that we're saving, which then converts into obviously operational energy or operational savings on the capital side and on the expense side.
Atif Qadir 36:45
We talked earlier about the different types of risks you had talked about the construction processes, about financing, around insurance. So big picture, talk to me about how you approach risk in your development strategy for The Edison?
Nate Helbach 37:02
Yeah, I mean, there's obviously a plethora of risk that you have in any real estate development. And I think there's this kind of paradox that leads you to potentially a paradox of choice problem of having way too much risk, way too much choices to make any decision which would leave you in stasis, if you were just looking at kind of the entire problem all in one phase. So what we try to do is break out the problem of how to build a building into multiple different phases. One of the books I'll plug that really explains this well is called the birth of the building by Ben Stevens, and he talks about breaking the development process into phases in that book, and does a beautiful job, much more articulate than I could ever be about how we take basically these chunks and chunk of building process into different iterative stages, but how We look at risk is really through pre development, entitlement, design, construction, lease up and stabilization, and then post stabilization, and we try to break down the kind of hierarchical risks within each stage. To going back to my original idea about this risk adjusted return, being able to achieve an adequate risk adjusted return on every single stage of the development process, so that we actually are able to have a good return overall.
Nate Helbach 38:33
So when we start a pre-development process, we're typically not buying the land, we're typically not spending a bunch of money on architecture and beautiful engineering and all these lovely details. What we're trying to do is really just get to a rough order of magnitude design that we can create a proforma that allows us to say, are we going to be able to proceed with this project, and it's going to be a good project that meets our untreated return on cost metrics, or is it one that we need to kind of throw away and maybe come back to in the future? That's the first kind of risk point that we look at.
Nate Helbach 39:07
Once we pass that point, then it's going into entitlements and seeing okay, what we have proforma and designed, does it meet code? Are we going to need variances? Are we going to need a rezoning? Are we going to need approvals from the neighborhood? What does it look like? And that breaks into all these kind of nuanced risks in that category. Then the next one is really full design. So understanding what the system is that we're using, maybe it's our low rise system that we already have pretty much kind of fully fleshed out. We know the construction costs for we can get to a level 600 of BIM model within a few months. Or is it something like Edison, where it's very customized, very niche, a lot of the details are going to be drawn really through the design process and then priced. So looking at all the layers of risk within that design, kind of pre construction phase, then it's rolling into understanding, okay, are we within budget? Are we making our original proforma? Are we still good for our untrended return on cost metric? And then from there, we go into construction. And construction adds this kind of new layer of risk of actually being able to execute and hopefully not finding, as we say, dead bodies in the ground where you are excavating, and it's a old burial round, or it's one of these crazy things that that may happen. And so understanding what the risk goes looks like there, and making sure we keep our contingency within line, so that we're actually not exceeding what our original budget was.
Atif Qadir 40:48
There's actually on your website, I think there's a webinar where you talk about risk management. So I think there, for any folks that will include that in the show notes as well as the poem from your community meeting we'll have in their show notes as well.
Nate Helbach 41:03
Yeah. And so then we go into lease up risk, which is really, in my mind, it's understanding, did we accurately project what the rental rates are, what our absorption pace is, or did we totally screw up? And so far, we've been relatively accurate, of course, it is a assumption. And so assumptions are not always accurate, but as they're in thin one standard deviation, one way or the other, it's likely going to be okay. And so then we have our lease up risk and absorption, and then once we get to end of absorption, then it's really just macroeconomics, because then we're looking at what is interest rate volatility over the next few months or years? How are we going to refinance? What type of long term debt facility are we going to put on this asset? And then really understanding when do we sell, and when are cap rates in the right spot where we feel like it's the appropriate level for us to be able to get a good return on the investment.
Atif Qadir 42:02
Which of those various risks are you the most worried about right now?
Nate Helbach 42:06
Edison, since we just started construction on Monday, it's construction risk. And we actually just had a webinar yesterday with the Forest Economic Advisors, and they do a bunch of economic analysis for mass timber, and I got a bit of great news, which helped me sleep a little bit better. Actually, I have this beautiful Garmin watch, and it tells me my sleep score. And last night, I got an 86. I was not staying up at night, which is great. But we found out that the tariffs that I think everyone has been concerned about, and that's been a hot topic lately, are not applicable to mass timber, because hopefully Trump says to his word about the reciprocal tariff policy that he's enacted as of April 2, and that would mean that any country that charges tariff on our goods going into their country, he's going to charge coming their way back into our country. And so because the EU, where we get a lot of our timber, does not charge a tariff on the mass timber leaving the United States and going to Europe, then there's no reciprocal tariff. Which was a bit of really relieving news, because we on Edison have a about a $6.5 million mass timber contract with a company called Store Enzo, which is actually the oldest European company. It's about 700 years old, so you can think about how many trees they've grown in 700 years in Finland, Sweden and Austria. But we were going potentially to have to pay 25% on that, which would be about 1.6 million. So I was quite nervous about that, but yesterday, we got a bit of good news. So that's been the latest big risk that was keeping me up at night.
Atif Qadir 43:53
I want to talk a little bit more about for folks that are listening, that are interested in doing mass timber or passive house on their own projects, but aren't really sure where to start. What tips would you have for developers who want to incorporate either or both into their projects?
Nate Helbach 44:09
Yeah, I would say a few tips are definitely do a lot of research and due diligence before you implement it. To be honest, sometimes it's not the right material. I think there's a few projects where you could argue it would be better to use something else, like stick frame, for example, might be better on some really, really small, low rise projects, even though I think you could build it with Master mer, it might be more economical to build with stick frame and you can buy FSC or SFI certified plumber, that would be pretty much just as sustainable. So definitely understand what you're building withfirst.
Nate Helbach 44:48
Secondarily, I think you need to understand the players in the market and make sure that there are good contractors that know how to erect and assemble the material. One thing we got really lucky of in Wisconsin is we have a contractor that's done it now on five different projects. And so they really have a great system. They have their own self performed crew that does all the erection. But mass timber is something that you really have to know how to assemble properly. Otherwise, a lot of things can go wrong. And going back to my risk adjusted return, that increases your risk and so understanding who's going to do the assembly. And then lastly, really making sure you partner up with a good manufacturer. Because there's, right now kind of a lot of, especially North American based opportunistic startups, or roughly startups, I'll say, compared to some of the older, well-established players, like Store Enzo, who's been in the business for 700 years, that definitely have a lot of risk.
Nate Helbach 45:48
Like, we went with someone a manufacturer that actually went bankrupt two years into design and and build up our building. So of course, that caused a lot of havoc, which is one of the reasons why we've gone over to Europe and sourced from the big kind of institutional players. So I think those are the three main areas of know your product, know who's going to be the kind of construction assembly crew, and then understand who your manufacturer is, and make sure they're really well entrenched in the business. And understand that you have to really be with them for about 18 to 24 months, so they need to be kind of financially viable, so to speak.
Atif Qadir 46:30
Okay. And one area I wanted to explore as well is the way that you raise capital. So for small-to-mid scale and larger developers, raising capital right now is insanely difficult. I mean, it's usually difficult, but now it's insanely difficult. And you've taken an innovative approach. So could you talk about that and what lessons you've taken away from that learning process?
Nate Helbach 46:52
Yeah, we took a distinct approach when we started of going out and trying to source high net worth individuals, instead of going to kind of big pension funds and institutional funds. Part of that was just indicative to when we started, which was right during COVID. And so a lot of the big pension funds turned the spigot off investing, especially with investing in kind of emerging managers. And so we went out for a cap raise and went to really friends and family and wealthy individuals and said, you want to invest $100,000, $200,000, $500,000 and it really got a lot of traction. And as we kind of kept getting traction, we actually met a few financial advisors that said, Hey, this is a great alternative asset for us to be able to invest client capital. Could we create some sort of programmatic relationship where we invest $4-5, $10 million on each deal as an alternative investment? And we said, Heck, yeah, that would be wonderful. And so now that we've kind of evolved, about 40% of our capital comes from wealth advisors, where we have nine different Wealth Advisors placing client capital with us.
Nate Helbach 48:03
We also got our latest project listed on Charles Schwab on their AI OneSource platform, and we have an SSID number so they can invest client capital right through their brokerage account, which they love. And then the other 60% continues to come from these kind of wealthy, high net worth individuals. And one big area that we've seen a big explosion in the last about 24 months is we launched our own investor portal, which is kind of similar to you can think about like Fundrise or Yieldstreet as some of the bigger players. But we created our own software, launched our own portal, and we've had a lot of success with that. And so people go on there. You can even do it as I'm talking, and look at neutral.us and then just click, invest with us. And you can see the full portal. And you can literally just create an account, log in, look at any deal. Our minimum is $10,000. You have to be an accredited investor. And you can then invest right online. And that's been a really big success for us. And it's really cool, because we're able to democratize real estate investing, which has oftentimes been really only for wealthy individuals and family offices, and now pretty much anyone who is accredited can invest. So a lot of investors have loved that, and we've been able to get them accretive returns on a pretty well risk adjusted basis.
Atif Qadir 49:25
Thank you for sharing this story of Neutral, of The Edison, and your personal path from being a student to being an entrepreneur and a developer. So I really appreciate your time, Nate.
Nate Helbach 49:38
Thanks for having me on. Glad to be here.
Atif Qadir 49:40
Absolutely.
Atif Qadir 49:41
I'm Atif Qadir, and thanks for joining me on American Building. If you enjoyed this episode, be sure to subscribe on your favorite listing app and leave a rating and review. America's housing crisis is one of our greatest challenges. But what are the real solutions? Hear from the developers and other industry experts driving meaningful change. Get our exclusive guide, Housing in America: Eight Ways We Can Solve Our Way Out of a Crisis at americanbuildingpodcast.com.